MORTGAGES

 


   Mortgages   
   ReMortgage   
   New Mortgage       Mortgage Redemption       Leasing   
Types of Mortgages

 


Mortgage Types

We provide information below on mortgage types: -

  • Repayment/Annuity
  • Pension-backed
  • Investment
  • Variable, Tracker, and Fixed interest rate Mortgages.
  • We also explain the meaning of the APR rate and its importance.


Repayment/Annuity Mortgage

The repayment/annuity mortgage is the most common one. Each month the borrower repays both monthly interest and a portion of the loan amount. Repayments in the early years of the mortgage are mainly comprised of interest. The balance of the mortgage loan owed decreases as the period progresses, until the loan is fully paid at the end of the mortgage term.

Pension Backed Mortgages

Pension mortgages are similar to investment interest-only mortgages. A pension plan supports the mortgage instead of an endowment policy. The product is generally only available to the self-employed or persons in non-pensionable employment, or Company Directors.

The lump-sum portion of a pension plan is used to repay the mortgage principal at mortgage maturity, timed to coincide with retirement.

The borrower has the unique advantage of gaining dual tax relief at the highest tax rate on the pension premiums which are all the "capital" repayments, and may also gain tax relief on the mortgage interest.

This can be the most tax efficient mortgage method for suitable borrowers.


Investment Mortgage

The investment type of mortgage was a popular option in past years when returns were better at a time of high interest rates and better investment returns.

The product is an interest only mortgage that is supported by an investment or endowment policy. The borrower pays only interest during the term of the mortgage and the loan amount remains outstanding until the end of the term. Premium payments are payable on the investment/endowment policy during the term. The investment/endowment type policy is similar to a life assurance investment/savings policy that is designed to provide an amount to repay the mortgage at the end of the term.

In recent years, shortfalls in the amounts available to pay off loans, have made this mortgage product defunct.

However, if the investment/endowment policy is calculated correctly, and contains suitable guarantees, and matures to an amount greater than the mortgage loan at term end, then the net policy maturity balance is paid to the borrower, less any taxes, in addition to paying off the mortgage (for policies taken out prior to 2001 the policies paid their lump sums free of any exit tax). Generally, these policies are not guaranteed and may generate a mortgage balance shortfall at maturity date of the mortgage.

Variable Rate

The interest on variable rate loans can rise or fall depending on changes decided by the lending institution. Rate changes are mainly determined by base interest rates set by the European Central Bank (ECB). If you can "live" with a varying interest rate and the fluctuating repayment amounts, then this may be a better, lower cost repayment option in the long term.

Tracker Mortgage

The best type of variable rate mortgage is the "Tracker" Mortgage. This is linked directly to the ECB rate.

Fixed Rate

The interest on fixed rate loans are fixed for a specified term generally ranging from one to ten years. During the fixed period, payments remain constant. The rate on a 20 year mortgage can be fixed for say 1, 3 or 5 years when interest rates are unlikely to fall, thereby ensuring constant payments during the period.
At the end of the fixed period, the borrower can choose to fix the rate for another period, using the rate prevailing at that time. Alternatively, the option of the variable rate is available.

If in the course of the agreed fixed period, the borrower wishes to pay back the loan or change the agreed rate, a redemption fee (break funding fee) is normally payable.

Generally, it may be more costly in the long term to fix rates as the Lender has to set a fixed rate projected above the long term rate expectations, so as not to loose money. However, fixed rates provide the borrower with peace of mind security - especially against the experience of a number of years ago when rates reached above 15%. However, this is unlikely in the present market climate.

APR Rate

The Annual Percentage Rate (APR) takes account of cost outlays that are payable at the beginning of a mortgage, which are additional to the interest payable. This is why the APR is higher than the related standard rate.

The APR is important as it enables realistic comparisons between the offerings of different lenders. For example, a special low start-up rate may be on offer to new customers for a fixed period. As the rate paid at the outset does not reflect the real cost of the loan, the APR informs the borrower of the annual percentage interest rate that may have to be paid in the future.

Warning: Your home is at risk if you do not keep up payments on a mortgage or any other loan secured on it.

Interest only Mortgage:-

Warning: The entire amount that you have borrowed will still be outstanding at the end of the interest-only period.

Variable-rate residential mortgage:-

Warning: The cost of your monthly repayments may increase - If you do not keep up your repayments you may loose your home.

Fixed rate mortgage or loan:-

Warning: You may have to pay charges if you pay off a fixed-rate loan early.

 

 
© Ellison Financial Consultants 2002 - All Rights Reserved | Privacy Policy | Terms of Service
Dr Gary Ellison t/a Ellison Financial Consultants is regulated by the Central Bank of Ireland. Member of the Professional Insurance Brokers Association (PIBA)

MEMBER